Contract Law (Study Notes) by zohasirhindi

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 (Study Notes)

         Zoha Sirhindi, Esq.
 LL.M. (Cornell), Attorney of NYS Bar Association

    LL.B. (London), Barrister of Lincoln’s Inn
   The Analytical Framework of Contract Law

                                        THE LAW OF OBLIGATIONS

        Contract                                     Tort                                        Restitution
(the law of ‘promises’ or                  (the law of ‘civil wrongs’)                        (the law of ‘unjust
     ‘expectations’)                                                                             enrichment’)

      Part I – How are contracts formed?...................................................................Page 1

                 - Invitations to treat
                 - Offers
                 - Acceptance
                 - Consideration
                 - Intention to create legal relations
                 - Certainty and completeness
                 - Form

      Part II – What is the content of contracts?........................................................Page 6

                 - Terms and representations
                 - Parol evidence rule
                 - Conditions / Warranties / Innominate Terms
                 - Exclusion clauses
                 - UCTA 1979 and UTCCR 1999

      Part III – Who can enforce contracts?................................................................Page 13

                 - Rules of privity
                 - Contracts (Rights of Third Parties) Act 1999
                 - Exceptions to the Privity Doctrine

      Part IV – How are contracts destroyed?.............................................................Page 17

                 - Incapacity
                 - Misrepresentation
                 - Mistake
                 - Illegality
                 - Duress and Undue Influence

      Part V – How do contracts come to an end
                and what are their consequences?.......................................................Page 23

                 - Discharge by Performance
                 - Discharge by Breach
                 - Discharge by Agreement
                 - Discharge by Frustration

                 - Damages
                 - Other remedies
                 - Law of Restitution
                 - Deposits and Part Payments
                 - Extinction of remedies
                         Part I - Formation of Contracts
A contract may be defined simply as a legally binding agreement. Alternatively, it may be defined as a promise or
set of promises which the law will enforce.

All contracts are agreements – but not all agreements are contracts.

Contracts may be classified as either bilateral or unilateral. A bilateral contract is one where a promise by one
party is exchanged for a promise by the other. The exchange of promises is enough to render them both
enforceable. Thus in a contract for the sale of goods, the buyer promises to pay the price and the seller promises
to deliver the goods.

A unilateral contract is one where one party promises to do something (usually pay a sum of money) in return for
an act of the other party, as opposed to a promise. A classic example is a reward case where A promises a reward
to anyone who will find his lost dog. The essence of a unilateral contract is that only one party, A, is bound to do
anything. No one is bound to search for the lost dog, but if B, having seen the offer, finds the dog and returns it, he
is entitled to the reward.

The test for the existence of an agreement is objective: Centrovincial Estates v Merchant Investors

What matters is not what meaning a party actually intended to convey by his words or conduct but what meaning a
reasonable person in the other party’s position would have understood him to be conveying. This is called the
‘promisee objectivity’ test.

An offer is a statement by one party of a willingness to enter into a contract on stated terms. An offer has to be
communicated to the offeree: Taylor v Laird

The distinction between an offer and an invitation to treat is primarily one of intention: did the maker of the
statement intend to be bound by an acceptance of his terms without further negotiation or did he only intend his
statement to be part of the continuing negotiation process? See Gibson v Manchester City Council
                                                             cf. Storer v Manchester City Council

Invitations to treat
An invitation to treat is simply an expression of willingness to enter into negotiations which may lead to the
conclusion of a contract.

A supply of information is a statement that merely provides information to the other party and is not intended to
be acted upon: See Harvey v Facey

Common types of invitations to treat:

      Display of Goods: Fisher v Bell & Pharmaceutical Society v Boots Cash Chemists

      Advertisements: Partridge v Crittenden & Carlill v Carbolic Smoke Ball & Lefkowitz v Minneapolis Stores

      Auctions: Harris v Nickerson & Barry v Davies

      Tenders: Harvela v Royal Trust Co. of Canada & Blackpool Aero Club v Blackpool Borough Council

      Time Tables and Automated Machines: Wilkie v London Transport & Thornton v Shoe Lane Parking

Methods of terminating an Offer
       If the offer is revoked (withdrawn) before acceptance: Routledge v Grant
        (Knowledge of the revocation may come from a third party rather than the offeror: Dickinson v Dodds)

       If the offer is rejected or a counter offer is made: Hyde v Wrench
        (Note that a request for further information is not a counter offer: Stevenson v McLean)

       On the lapse of set time or reasonable time: Ramsgate Victoria Hotel v Montefiore

         On the failure of a contingent condition precedent: Financings v Stimpson

         On the death of the offeree. It also terminates on the death of the offeror if the contract involves a personal
          element or the offeree has knowledge of the offeror’s death: Bradbury v Morgan

         Unilateral offers can be terminated before performance begins: Errington v Errington & Daulia v Millbank
          & Luxor v Cooper*

         Unilateral offers to the world-at-large can be terminated before complete performance and their revocation
          should reach the same audience as the offer (preferably same channel): Shuey v US

Rules of Acceptance
An acceptance is an unqualified expression of assent to the terms proposed by the offeror.

         Acceptance must be communicated to the offeror: Entores v Miles Far Eastern Corporation

         Acceptance may be inferred from conduct: Brogden v Metropolitan Railway

         Acceptance cannot be silence: Felthouse v Bindley

         Acceptance cannot occur if offeree does not have knowledge of the offer: R v Clarke & Gibbins v Proctor†

         Motive for acceptance is irrelevant: Williams v Cowardine

         Acceptance must be made by the offeree or his agent: Powell v Lee

         Acceptance cannot be in the form of a cross offer: Tinn v Hoffman

         Acceptance must be the “last shot” in a “battle-of-the-forms”: Butler Machine Tool v Ex-Cell-O Corporation

         Complete performance amounts to acceptance in unilateral contracts: Daulia v Millbank

         Methods of Acceptance:

          (a) By post: Adams v Lindsell - the postal rule is established
                       Hentorn v Fraser - it must be reasonable for the offeree to use the post
                       Holwell Securities v Hughes – the postal rule does not apply where it would lead to manifest absurdity
                       Byrne v Van Tienhoven - the postal rule does not apply to letters of revocation

            Exam tip: Note how the postal rule applies to the following factual scenarios:

           If the letter is lost in the post, the postal rule still applies: Household Fire Insurance v Grant; but does
           not apply if the letter was lost because of the carelessness of the offeree (e.g. an incorrect address
           was used or the letter was not properly stamped): Korbetis v Transgrain Shipping

           If the acceptance was posted and then a rejection was made, the postal rule still applies (assuming
           it was reasonable for the offeree to use the post in the first place). However, it does not apply if (i) the
           rejection reaches the offeror first and (ii) the offeror changes his position in reliance on it. There is no
           English law authority on this point.

           If a rejection was made and then the acceptance was posted, the postal rule does not apply.
           Whichever one reaches first is effective (“It’s a race!”). There is no English law authority on this point.

          (b) By instantaneous mediums: Entores v Miles Far Eastern & The Brimnes
                                        Allianz Insurance v Aigaion Insurance

          (c) Prescribed method: Manchester Diosecean Council v Commercial Investments

* It is suggested that this case be confined to agency scenarios
  Not considered good law

Consideration is defined as, “Some right, interest, profit, or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other” (per Lush J in Currie v Misa).

Consideration is needed for the formation and variation of a contract. There are three forms of consideration:

Executory consideration: Consideration is called executory where there is an exchange of promises to perform
acts in the future. For example, a bilateral contract for the sale of goods wherein A promises to deliver goods to B
at a future date and B promises to pay on delivery.

Executed consideration: This arises in unilateral contracts where the act of acceptance is also the consideration.
If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed
consideration. However, this label is also used to describe the situation where, in a bilateral contract, one party has
performed as per his promise – in the above example it would be when A delivers the good to B.

Past consideration: Consideration that comes before the promise. If one party voluntarily performs an act and the
other party then makes a promise, the consideration for the promise is said to be in the past. Past consideration is
not a valid form of consideration.

       Consideration must be sufficient (of economic value) but need not be adequate:
        Chappell v Nestle & White v Bluett

       Past consideration is not good consideration: ReMcArdle

        Exception: Doctrine of implied assumpsit: Lampeigh v Braitwait & Pau On v Lau Long

       Consideration must move (come) from the promisee: Tweedle v Atkinson

        Note there is no equivalent requirement that consideration must move to the promisor: Bolton v Madden

       Consideration must not be something the promisee is already bound to do:

            o   Legal Duty: Collins v Godefroy

                Exception: Performance exceeds legal duty: Glasbrook Ltd v Glamorgan CC

            o   Contractual Duty: Stilk v Myrick

                Exception 1: Performance exceeds contractual duty: Hartley v Ponsonby
                Exception 2: Practical benefit: Williams v Roffey

                The concept of ‘practical benefit’ does not extend to contracts of debt: Re: Selectmove

            o   But consideration can be something the promisee is bound to do for a third party: Scottson v Pegg

       Consideration must not be part payment of a debt: Foakes v Beer Exception: Pinnel’s Case

       Consideration must not be forbearance to sue for an invalid claim: Wade v Simeons & Cook v Wright

       Consideration exists when the variation or discharge is capable of benefiting either party:
        WJ Alan v El Nasr

                                                    Promissory Estoppel

Promissory Estoppel is defined as, “Where, by words or conduct, a person makes an unambiguous
representation as to his future conduct, intending the representation to be relied on and to affect the legal relations
between the parties, and the representee alters his position in reliance on it, the representor will be unable to act
inconsistently with the representation if by so doing the representee would be prejudiced”.
See Central London Property v High Tree House

 Exam tip: Consider promissory estoppel only after you are unable to ‘find’ consideration for a particular promise.

Seven conditions must be satisfied:

         There must be a pre-existing contractual relationship: Hughes v Metropolitan Railways

         The promise must be unequivocal (but can be implied) as to future conduct:
          Israel Cocoa v Nigerian Produce Marketing

         The promisee must have acted in reliance (whether to his detriment or not): WJ Alan v El Nasr

         It can only suspend not extinguish rights* : Tool Metal v Tungsten Electric

         It must be inequitable to allow the promisor to go back on his promise: D&C Builders v Rees

         It can only be used as a defence and not as a cause of action: Combe v Combe

         The promise must not be prohibited by legislation: Evans v Amicus Healthcare

Doctrine of Waiver: Where one party voluntarily accedes to a request by another to forbear his right to strict
performance of the contract, or where he promises another that he will not insist upon his right to strict
performance of the contract, the court may hold that he has waived his right to performance as initially
contemplated by the parties.

See Hickman v Haynes.

 Exam tip: Consider the doctrine of waiver if you are being asked to advise a potential claimant. Note that the
doctrine of waiver will factually overlap with promissory estoppel where the promisor is waiving a particular
condition or obligation of the contract but in such a situation the doctrine of waiver, unlike estoppel, can be used by
the promisee as a cause of action.

For example, you are asked to advise a contractor in a claim against a home owner. Homeowner’s duty to make
monthly payments is conditioned on the contractor providing an architect’s certificate that the work done the prior
month was acceptable. Homeowner tells the contractor that he will make future payments without a certificate and
so the contractor does not provide the certificate the next month; the homeowner then refuses to pay. The
contractor will be able to successfully sue the homeowner on the grounds of waiver.

 Exam tip: In an essay question asking you to consider the relationship between consideration and promissory
estoppel, always cite the analysis of the Australian High Court in Walton Stores v Maher where the court ruled that
in appropriate cases promissory estoppel could be used as a cause of action in the absence of a pre-existing legal

* Arguably this principle applies only to contracts that involve periodic performance say when a tenant has to make monthly rent payments. If
the contract stipulates the payment of a single lump sum then the effect can be permanent as in a scenario like the D&C Builders case.
                                Intention to create legal relations

The determination of whether or not the parties actually intended to enter into legally binding relations is an
objective one and context is all important. The courts will not examine the states of mind of the parties to the
agreement (a subjective approach) but will ask whether or not reasonable parties to such an agreement would
possess an intention to create legal relations.

Although the presumptions can be rebutted by evidence of contrary intention, the presumptions themselves are
matters of public policy: that contract law should be confined to the commercial sphere and should not operate in
social or domestic situations – otherwise the courts would be swamped by trifling domestic disputes.

      Social and domestic agreements are presumed not have legal effect:

               (i) Husband and wife: Balfour v Balfour & Merritt v Merritt
               (ii) Parent and child: Jones v Padavatton
               (iii) Friends: Simpkins v Pays & Coward v MIB

       Rebuttal: (i) Business context: Snelling v John Snelling
                 (ii) Detrimental reliance: Parker v Clark

      Commercial and business agreements are presumed to have legal effect:

       Esso Petroleum v Commissioners of Customs and Excise
       Edwards v Skyways

       Rebuttal: (i) Honour clauses: Rose and Frank v J R Crompton and Bros
                 (ii) Subject to contract clause: Tiverton Estates v Wearwell
                 (iii) Comfort letters: Kleinwort Benson v Malaysia Mining

                                   Certainty and Completeness

      Uncertainty may be caused by vagueness and/or incompleteness:

       Scammell v Ouston & Nicolene v Simmonds & Hillas v Arcos

                                        Requirements of Form

      Unilateral gratuitous promises contained in a deed are enforceable irrespective of consideration.

      A deed is a document which (a) bears the word ‘deed’, (b) is signed by the maker of the deed, (c) is
       attested by at least one witness and (d) is delivered i.e. some conduct that shows that the person
       executing the deed intends to be bound by it.

      Certain contracts such as those pertaining to the sale or other disposition of an interest in land must be
       made in writing.

      At common law, a defect in form renders a contract unenforceable (but not void). This is subject to the
       equitable doctrine of part performance.

                          Part II - Contents of Contracts

Difference between Terms and Representations
A term is a word or phrase that is part of the contract. Terms define the obligations/undertakings of a party.

A representation is a statement which simply asserts the truth of a given state of facts.

An objective test of intention is used to determine whether a word or phrase is a term or representation
Heilbut, Symons & Co. v Buckleton

The following factors are considered in determining objective intention:

       Importance of the Statement: Couchman v Hill

       Strength of the statement/Need for verification: Schawel v Reade & Ecay v Godfrey

       Special knowledge and skill: Bentley Productions v Harold Smith Motors & Oscar Chess v Williams

       Timing of the statement: Routledge v McKay

       In a written form: Duffy v Newcastle United Football

The Parol Evidence Rule
The parol evidence rule is that where the contract is embodied in a written document, extrinsic evidence is not
generally admissible to vary, contradict or interpret the document. The document is the sole repository of the terms
of the contract.

Entire agreement clauses are often used to, in effect, codify this rule.

There are many exceptions to this rule:

    o   Partially written agreement: Couchman v Hill
    o   Operating status of the contract: Pym v Campbell
    o   Rectifications
    o   Implied terms
    o   Evidence about the capacity of parties
    o   Aids to construction
    o   Proving custom: Hutton v Warren
    o   Collateral contracts: City and Westminster Properties v Mudd

Rules regarding Implied Terms
Terms may be implied into a contract:

       By statute: Sections 12-15 of the Sale of Goods Act 1979

       By custom: Hutton v Warren

       By common law:

            o    Terms ‘implied in fact’:
                 ‘Business Efficacy’ test: The Moorcock; ‘Officious Bystander test’: Shirlaw v Southern Foundries

            o    Terms ‘implied in law’:
                 El Awadi v BCCI lays down two requirements: (i) Contract of a defined type; (ii) The necessity test

       Distinguishing between Conditions / Warranties / Innominate terms

A condition is an essential term of the contract which goes to the root of the contract. A breach of a condition
enables the party who is not in breach of contract (‘the innocent party’) either to terminate performance of the
contract and obtain damages for any loss suffered as result of breach or to affirm the contract and recover
damages for breach.

Such promissory conditions should be distinguished from contingent conditions – events upon which the
existence of the contract is dependent. A contingent condition may be a condition precedent (‘if’), a condition
concurrent (‘as long as’) or a condition subsequent (‘until’).

A warranty is a lesser, subsidiary term of the contract. A breach of a warranty only enables the innocent party to
claim damages; he cannot terminate performance of the contract and must therefore continue to perform his
obligations under the contract.

Distinguish this meaning from the following: A warranty is an assurance by one party (the warrantor) to the other
that certain facts or conditions are true or will happen; the other party is permitted to rely on that assurance and
seek some type of remedy if it is not true or followed. This is the sense in which the word is used when giving a
‘lifetime warranty’ on the sale of a product or when buyers and sellers make ‘representations and warranties’ in a
commercial transaction such as a sale of a business.

Terms may be classified into conditions or warranty:

 (a) By statute: Sections 12-15 of the Sale of Goods Act 1979

 (b) By courts: (i) By necessary implication as term goes to the root of the contract: Couchman v Hill

               (ii) Due to a previous binding authority on the matter: Arcos v Ronaasen

 (c) By the parties themselves: Lombard North Central v Butterworth & Schuler AG v Wickman Machine Tool

An innominate term can be distinguished from a condition on the ground that breach of an innominate term does
not automatically give rise to a right to terminate performance of the contract and it can be distinguished from a
warranty as the innocent party is not confined to a remedy in damages. This third classification originated in Hong
Kong Fir Shipping v Kawasaki and gives the court an important degree of remedial flexibility.

Example: The Hansa Nord

The following factors will be looked at in order to assess whether or not the breach was sufficiently serious:

(i) Any detriment caused or likely to be caused by the breach
(ii) Any delay caused or likely to be caused by the breach
(iii) The value of any performance received by or tendered to the party not in breach
(iv) The cost of making any performance given or tendered by the party in breach conform with the contract
(v) Any offer by the party in breach to remedy the breach
(vi) Whether the party in breach has previously breached the contract or is likely to breach it in the future
(vii) Whether the party not in breach will be adequately compensated by an award of damages

                                           Criteria for a valid exclusion clause

An exclusion clause is a clause in a contract or a term in a notice which appears to exclude or restrict a liability or
a legal duty which would otherwise arise.

Courts have generally treated exclusion clauses as a defence to a breach of an obligation.

 Exam tip: Remember to follow the three step process below in order to conclusively determine the validity of an
exclusion clause.

1) Incorporation – is the clause a part of the contract?

           (a) Signature: L’Estrange v Graucob & Grogan v Robin

                              Defence of ‘Non est factum’: Gallie v Lee & United Dominions Trust v Western

           (b) Reasonable notice: Parker v South Eastern Railway – must take reasonable steps to inform claimant
                                  Thompson v LMS Railway*– exclusion clause inside the railway timetable is good enough
                                  Sugar v LMS Railway – reference to the exclusion clause obliterated
                                  Henderson v Stevenson – an exclusion clause should be referred to on the front of the ticket
                                  Olley v Marlborough Court – the notice should not come after formation of the contract
                                  Chapelton v Barry UDC – the document must be of a contractual nature
                                  Spurling v Bradshaw – the red hand rule

           (c) Previous course of dealing: McCutcheon v David MacBryne Ltd – must be regular and consistent
                                           Henry Kendall v William Lilico – 100 contracts over 3 years is regular and consistent
                                           Hollier v Rambler Motors – 3 or 4 contracts over 5 years is not regular and consistent

           (d) Trade usage or custom: British Crane Hire v Ipswich

2) Interpretation – does the clause cover the loss that has arisen?

           The Contra Proferentum rule: If there is any ambiguity as to the meaning of an exclusion clause the court
           will construe it contra proferentum i.e. against the party who inserted it into the contract and now seeks to
           rely upon it. For example: Houghton v Trafalgar Insurance

           Rules of construction for excluding negligence liability: Canada Steamship v The King

           Doctrine of Fundamental Breach: Photo Production v Securicor Transport

3) Legal Controls – is there any rule of law that would invalidate the clause?

           (a) Statutory: Unfair Contract Terms Act 1977
                          Unfair Terms in Consumer Contracts Regulations 1999
                          Sale of Goods Act 1979

           (b) Common Law: (i) Misrepresenting the effect of the exclusion clause: Curtis v Chemical Cleaning
                           (ii) Inconsistent oral promise: Mendelssohn v Normand

* It is likely that this is no longer good law.
                                   Unfair Contract Terms Act 1977

UCTA uses two methods of controlling exclusion clauses: declaring them ineffective and making them subject
to reasonableness.

UCTA does not apply to contracts concerning land, contracts which create or transfer most forms of intellectual
property, contracts relating to the formation or dissolution of a company or any contract of insurance.

Sections 2 to7 only apply to ‘business liability’: s.1(3). Business liability is defined as liability for breach of
obligations or duties arising from things done or to be done by a person in the course of a business (whether his
own business or another’s). In other words, the party seeking to rely on exclusion clauses covered by ss. 2 - 7
must be acting in the course of a business.

Exclusion of Negligence Liability: Section 2

Liability for death or personal injury resulting from negligence cannot be excluded or limited – clauses purporting to
do so will simply be ineffective. This includes liability for negligence in tort as well as contract. Responsibility for
negligence which causes some other type of harm such as economic loss can only be limited or excluded where it
is reasonable to do so.

As per s.13(1), section 2 also applies to duty defining clauses i.e. clauses that purport to allocate responsibility
rather than exclude liability.

Phillips Products Ltd. v Hyland & Smith v Eric Bush

Exclusion of Contractual Liability: Section 3

Where one party deals as a consumer or on the other party’s written standard terms of business, then the other
party cannot exclude or restrict his liability for breach of contract, except subject to the requirement of
reasonableness. This reasonableness requirement is also extended to terms purporting to entitle the other party to
render (i) performance substantially different from that reasonably expected; or (ii) no performance at all.

Example: Timeload Ltd v British Telecommunications

Section 12 states that a party “deals as a consumer” if he does not make the contract “in the course of business”
and the other party does. A contract is made “in the course of business” if it is integral to the business or it forms
part of the regular course of dealing of that business: R & B Custom Brokers v United Dominion Trust. Note that
this phrase has a different meaning under SGA 1979.

Indemnities by consumers: Section 4

An indemnity clause is one which provides that one party will reimburse (indemnify) the other in the event of any
loss arising from the contract. The effect of an indemnity clause is often to transfer liability away from the party who
would normally be liable. Under s.4 such clauses are only valid if they are reasonable. For example, contracts for
the hire of a lorry and a driver sometimes contain a clause by which the hirer promises to indemnify the owner for
any injury, loss or damage caused by the negligence of the driver. This section has no application to commercial
indemnity clauses.

Implied Terms in Sale of Goods contracts: Section 6

Legislation such as the Sale of Goods Act 1979 implies certain terms into contracts for the sale of goods and hire-
purchase contracts. Exclusion of these terms is controlled by s.6 of UCTA. The implied condition that the seller has
the right to sell the goods in s.12 of SGA can never be excluded. Other terms implied by ss.13-15 of SGA cannot
be excluded if one party deals as a consumer. Where neither of the parties is dealing as a consumer the exclusion
clause will be subject to a requirement of reasonableness.

Exclusion of Misrepresentation Liability: Section 8

Section 8 of UCTA substitutes a new section 3 into the Misrepresentation Act 1967. Section 3 of the
Misrepresentation Act 1967 makes a clause excluding liability for misrepresentation subject to reasonableness as
per section 11 of UCTA 1977. The onus lies on the party relying on the exclusion clause to show that it is
reasonable. An application of this section can be seen in Walker v Boyle.

The Reasonableness Test: Section 11

Where a term must satisfy the requirement of reasonableness, the test is that the term shall have been a fair and
reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been,
known to or in contemplation of the parties when the contract was made: s.11(1). Once again, the onus lies on the
party relying on the exclusion clause to show that it is reasonable.

The impugned clause should be looked at as a whole while assessing reasonableness and not only to the part of
the clause which is being relied upon as the unreasonable – the unreasonable part of the clause cannot be
severed: Stewart Gill v Horatio

Schedule 2 of the Act provides some guidelines on assessing reasonableness. As per these guidelines, the
relevant factors when assessing reasonableness include:

       The strength of the bargaining positions of the parties
       Whether the customer received an inducement to agree to the term
       Whether the customer had the opportunity of entering into a similar contract with others w/o such a term
       Whether the customer knew or ought reasonably to have known of the existence of the term
       Whether the goods were manufactured or adapted to the special order of the customer

In addition to the guidelines, the following factors may also be taken into account:

       Availability of insurance at the time of contract formation: The Flamer Pride
       Whether the clause undermined an express promise: Lease Management v Purnell Secretarial
       Enforcement of the clause in practice: George Mitchell v Finney Lock Seeds
       Whether the clause tries to cover two very different types of loss: Overseas Medical v Orient Transport
       Limitation clauses are more likely to be considered reasonable than exclusion clauses especially if there is
        some objective justification for the selection of the figure: St Albans City Council v International Computers

Attempts at evading UCTA: Section 13 and Section 10

Paragraphs (a) to (c) of s.13(1) ensure that clauses which the effect of excluding or restricting liability but in a
slightly round about way, are dealt with as if they limited or excluded liability more simply. For example, paragraph
(a) covers a clause stating that any claim must be made with a certain time period and paragraph (b) covers a
clause which allows recovery of damages but which purports to remove any right to terminate the contract for
breach whereas paragraph (c) will nullify a clause stating that signature was proof that the goods delivered met the
requirements of the contract.

The last part of s.13(1) is similarly a provision to prevent evasion of the Act by exclusion clauses in ‘disguise’. It
ensures that some clauses which, in form, define the obligation will be identified as exclusion clauses, in nature, for
the purposes of ss. 2,5,6,7. The difficulty is that it does not indicate how to determine which clauses are to be
treated in this way.

Section 10 states that an exclusion clause which is contained in a separate contract rather than in the contract
giving rise to the liability, is ineffective in so far as it attempts to take away a right to enforce a liability which under
the Act cannot be excluded or restricted. The mischief at which this section is aimed is the practice of seeking to
evade the Act by the use of another contract e.g. where a term in a contract between a manufacturer of a product
and a purchaser purports to affect the rights of the purchaser against the vendor under the Sale of Goods Act
1979. This section therefore applies to attempts to evade the provisions of UCTA by the introduction of an
exclusion clause in a contract with a third party, but does not apply to genuine compromises of existing claims.

                                                                                                            - 10 - | P a g e
                Unfair Terms in Consumer Contracts Regulations 1999

Scope: The regulations apply to unfair terms in contracts (and is not limited to exclusion clauses) concluded
between a seller or a supplier and a consumer (reg.4(1)). A consumer is a ‘natural person who is acting for
purposes which are outside his trade, business or profession’ (reg.3(1)).

Effect: An unfair term shall not be binding on the consumer; however the contract shall continue to bind the parties
if capable of existing without the unfair terms (reg.8(1)&(2)). A contract term that has not been individually
negotiated shall be regarded as unfair, if contrary to the requirement of good faith, it causes a significant imbalance
in the parties’ rights and obligations to the detriment of the consumer (reg.5(1)). In Director-General of Fair
Trading v First National Bank, it was held that ‘good faith’ relates to the need for ‘fair and open dealing’ (the
consumer must be given full information - there should be no ‘pitfalls or traps’ in the contract) whereas ‘significant
imbalance’ arises where a term is so weighted in favour of the supplier that it tilts the contractual rights and
obligations significantly in favour of the supplier. In other words, ‘significant imbalance’ is concerned with
substantive fairness, whereas ‘good faith’ relates to procedural fairness.

A term will be regarded as ‘not individually negotiated’ if drafted in advance and so the consumer has not been
able to influence the substance of the term (reg.5(2)). However, even where a specific term has been negotiated,
this will not prevent the regulations applying to the rest of the contract if, overall, it is a pre-formulated standard
form of contract (reg.5(3)). The burden of proving that a term was individually negotiated falls on the seller or
supplier (reg.5(4)).

Schedule 2 contains an ‘indicative and non-exhaustive list’ of terms which may be regarded as unfair.

In the case of written contracts, a seller or supplier must ensure that any written term is expressed in plain,
intelligible language (reg.7(1)).

 Exam tip: One of the simplest ways of applying the UTCCR in the exam is to compare the clause in question
with the list of unfair terms stated in Schedule 2 of the UTCCR.

Core provisions: No assessment shall be made of the fairness of any term which relates to the definition of the
main subject matter of the contract or the adequacy of the price or remuneration as against the goods or services
supplied so long as that term is in plain, intelligible language (reg.6(2)).

                                         Sale of Goods Act 1979

The Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994 implies certain terms into a
sale of goods contract.

A sale of goods contract is defined as “the agreement by which the seller transfers or agrees to transfer the
property in goods to the buyer for a money consideration, called the price”. Thus, the Act applies only to goods
sold for money and does not cover other kinds of transaction such as exchanging of goods.

‘Goods’ has been interpreted broadly. It has been held to include packaging surrounding goods and instructions
appearing on the packaging. It does not cover services, which are covered by the Supply of Goods and Services
Act 1982.

Certain provisions of the SGA apply only when goods are sold ‘in the course of a business’. The Court of Appeal
in Stevenson v Rogers, gave the phrase a very wide scope and held that all sales of goods made by business met
this requirement even if the sale of such goods was not the regular trade of the business. It does not require any
regularity of dealing or indeed any previous dealing at all.

Title: Section 12

Under s.12(1), a condition is implied into any contract for the sale of goods that the seller has a right to sell the
goods and is able to pass good title to the buyer. A breach of this condition amounts to a total failure of
consideration and the buyer may claim back the price of the goods even if they have been used for some time.
Section 6 of UCTA prevents this section from ever being excluded.

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Sale by description: Section 13

Section 13(1) states that ‘where there is a contract for the sale of goods by description, there is an implied
condition that the goods will correspond with the description’. In many cases, the implied term as to description will
also be an express term of the contract. If a buyer is told that a sweater is cashmere, it is likely to become an
express term of the contract alongside the implied term that the good correspond with that description. Since s.13
is not limited to sale ‘in the course of business’, it can apply to ‘private sales’.

Satisfactory quality and Fitness for purpose: Section 14

Section 14(2) requires that goods sold in the course of a business should be of satisfactory quality which means
that they should ‘meet the standard that a reasonable person would regard as satisfactory’, taking into account
their price, description and other relevant circumstances. In assessing the quality of goods, the courts may take
into account their fitness for their usual purpose, their appearance and finish, freedom from minor defects, safety
and durability. The requirement of satisfactory quality will not apply where any defect or other matter is specifically
drawn to the buyer’s attention before the contract is made, or which ought to have been revealed by the buyer’s
own examination of the good: s.14(2(C)). There is no obligation for a purchaser to examine the goods and a
cursory look at them – without opening the packaging for example – is not expected to reveal defects. On the other
hand, where a purchaser does examine the goods before buying, any defects he or she should have spotted will
not be covered.

Section 14(3) basically states that if a buyer tells the seller the goods are required for a particular purpose and the
seller goes ahead and sells them, they must be fit for that purpose even if it is an unusual one. But it must be
proved that the buyer was indeed relying on the seller’s advice in making his choice. The condition will be implied
only when the goods are sold in course of a business.

There is often an overlap between the conditions on fitness for purpose and satisfactory quality. Where the
purpose for which the buyer claims to want the goods is their ordinary purpose, the ability of those goods to fulfil
that purpose may also be a measure of their satisfactory quality.

Note the analogous section 13 of the Supply of Goods and Services Act 1982 which provides that a person who
supplies a service in the course of business impliedly undertakes to ‘carry out the service with reasonable care and

Sale by sample: Section 15

Section 15 provides that where the goods are sold by sample, there is an implied condition that the bulk of the
goods will correspond with the sample, that the buyer will have a reasonable opportunity of comparing the bulk with
the sample and that the goods will be free from any defect, rendering them unsatisfactory, which would not be
apparent on reasonable examination of the sample.

Remedies for breach of implied terms

The Sale and Supply of Goods Act 1994 amended the Sale of Goods Act 1979, inserting a new s.15A which
deems a breach of the conditions implied by ss.13, 14, and 15 to be merely a breach of warranty under certain
circumstances. These circumstances are that the buyer does not deal as a consumer and breach is so slight that it
would be unreasonable to reject the goods. As a result, the buyer is not allowed to reject the goods, but has only a
right to claim damages.

In addition, SGA used to provide that once the buyer had accepted goods of them, any breach of the implied terms
would only be treated as a breach of warranty so that the buyer could not get back the money paid and could only
sue for damages. The new amended SGA attempts to address this problem. Although acceptance will still be
deemed to have taken place unless the seller is told otherwise within a reasonable length of time, this length of
time is now required to be long enough to give the buyer a reasonable opportunity to examine the goods. In
addition, the SGA now provides that doing something which is inconsistent with the seller’s ownership of the goods
will not mean that the buyer loses the right to reject them until they have had a reasonable opportunity of
examining to see if they conform to the contract. Asking for or accepting a repair to defective goods does not
amount to acceptance and therefore does not cancel the buyer’s right to reject the goods.

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                              Part III - Privity of Contract
There are two rules to the doctrine of privity. The first rule is that the third party can not be made the subject of
a burden imposed by the contract. The second rule is that a third party cannot enforce a contract that has the
objective of conferring a benefit to him. It is the second rule that was thought to be unfair and now, after reforms,
has very limited application. The classical position on the matter can be shown by the case of Beswick v Beswick.

There is a very close relationship between the second rule of privity and the rule of consideration that it must
move/come from the promisee. However, the courts have stated that privity and consideration constitute two
hurdles and not one. The “joint promisee” example is used to make this point: X makes a promise to Y and Z to
pay £100 to Z in exchange for consideration provided by Y. In such a case Z is privy to the contract but can not
maintain against X as he has not provided consideration for X’s promise.

Compare Tweedle v Atkinson with Dunlop Pneumatic Tyre v Selfridge

            Statutory rights: Contracts (Rights of Third Parties) Act 1999

Applicability: Third parties can enforce contractual terms in the following two situations:

(i) Express provision: s.1(1) a

(ii) The contract purports to confer a benefit: s.1(1) b. This is subject to an important proviso in s.1(2) whereby it
will not apply ‘if on the proper construction of the contract it appears that the parties did not intend the term to be
enforceable by the third party’. See Nisshin Shipping v Cleaves

Although, it is not necessary for the third party to be specifically named, it is necessary for the third party to be
‘expressly identified in the contract by name, as a member of a class or as answering a particular description’
s.1(3). See Avraamides v Colwill

Enforcement: The right of the third party to enforce a term of the contract is subject to the terms of the contract:
s.1(4). This means that the parties to the contract can impose conditions upon the third party’s ability to exercise
his rights under the contract. For example, they could stipulate that the third party could receive a benefit under the
contract only if he applied for it within a certain time period. Third parties have the same remedies as would be
available to them if they were contracting parties, including the rights to damages and specific performance: s.1(5).
Although the contract is enforceable by the promisee as well as the third party, there cannot be double liability for
the promisor: s.5; so any recovery by the promisee would have the effect of reducing any award subsequently
made to the third party.

Consent to variations: Section 2 deals with the issue of amending and cancelling the contract. This states that,
unless the contract provides otherwise, the parties to the contract may not rescind the contract, or vary it so as to
extinguish or alter the third party’s rights, if the third party has either communicated to the promisor their assent to
the relevant term or has relied on the term and the promisor knows of the reliance or can be reasonably expected
to have foreseen that reliance. If one of these three situations applies, then any variations or cancellation can only
take place with the consent of the third party. The Act permits the contracting parties to vary the circumstances in
which a third party’s consent is required, or to exclude its requirement altogether: s.2(3).

Defences: In an action by the third party, the promisor is able to rely on any defence arising out of the contract
which would have been available to him had the claim been by the promisee: s.3. Thus, if the promisee induced
the promise by misrepresentation or duress, the promisor can use that as a defence to an action by the third party.

N.B. It must be remembered that the main contracting parties are still in control. They can decide that the
provisions of the Act should not apply and there will be nothing that the third party can do about it.

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                                  Exceptions to the Privity Doctrine

(a) Agency

An agent is a person authorized to negotiate and enter into contracts on behalf of another who is known as the
principal. There are three circumstances in which a person will be treated as being the principal’s agent: (i) where
there is express or implied authority (ii) where there is apparent or ostensible authority or (iii) where he has
authority by operation of law. The principal will be bound by any contract the agent makes while acting within his

Where an agent makes a contract which lies outside the authority granted by the principal, or where the agent in
fact has no authority at all, the principal may nevertheless choose to ratify the contract, so long as the agent was
purporting to act on the principal’s behalf at the time the contract was made and the principal had the capacity to
make the contract at the time. The ability of a principal to ratify an unauthorized act of his agent is said to be an
exception to the doctrine of privity.

Another rule that flouts the doctrine of privity is that a principal may, in certain circumstances, sue upon a contract
made when the agent did not disclose to the third party that he was acting as an agent for the principal. In these
conditions, the third party can find himself in a contractual relationship with a person of whose existence he was
unaware of at the time that he entered into the contract.

(b) Assignment

 Exam tip: Look for it in the situation where a third party enters the scene after a contract has been made.

In certain circumstances, it is possible to assign (in effect to sell) the benefit (i.e. a contractual right) of a contract
without the permission of the other party though normally notice of the transaction must be given. A common
example is selling debts to factoring houses.

Rights arising from contracts for personal services and those contrary to public interest are incapable of
assignment. For example, an employer is not entitled to transfer the benefit of his employee’s services to a third

(c) Negotiable Instruments

A negotiable instrument is an instrument which may be transferred by delivery and indorsement to a good faith
purchaser for value who then takes the instrument free from any defects in the title of the transferor. For example,
a cheque is a written order by a person (‘the drawer’) to his bank (‘the drawee’) to pay on demand a stated sum of
money to a named person (‘the payee’). The named person, if he so wishes, can transfer the cheque to another
party. This new party then becomes the payee and can demand payment from the bank.

Note that the payee(s) is not privy to the contract between the drawer and drawee and has not furnished any
consideration to the bank. The advantage of a negotiable instrument as compared with an assignment is that a
bona fide holder for value who is without notice of any defect in the title of the transferor obtains a good title and is
able to demand payment.

(d) Collateral Contracts

A collateral contract is a second independent and separate contract made between the original parties (in which
the consideration will be the entry into the ‘original’ or ‘associated’ contract) OR between a third party and an
original party - before or at the same time the first or main contract is made.

Where one party makes contracts with two other parties, the courts will sometimes use the device of ‘finding’ a
collateral contract between the two other parties (the promisor and the third party) to evade the privity rule.

Shanklin Pier v Detel Products & Andrews v Hopkinson

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(e) The Eurymedon Device

In Scruttons v Midland, the claimants who were the owners of the goods, entered into a contract with a firm of
carriers for their transportation. Under the contract, the carriers limited their liability to $500. Stevedores, who were
hired by the carriers, negligently damaged the goods and the claimants brought an action in tort against them. The
stevedores sought to rely on the limitation clause contained in the contract between themselves and the carriers
but it was held that they could not do so because they were not privy to the same contract. The House of Lords
held that English law did not recognize any doctrine of vicarious immunity which would have enabled the
stevedores as agents, to claim the benefit of the immunity which had been negotiated by their principals. Besides,
the limitation clause only referred to the carriers and so was incapable of providing protection for the stevedores.

However, Lord Reid stated that the stevedores might be able to claim the protection of an exclusion clause if four
requirements were satisfied. These were:

(i) The contract made it clear that the stevedores were intended to receive the protection of the exemption clause.

(ii) The contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting on
behalf of the stevedores.

(iii) The carrier had authority from the stevedore to enter into the contract on his behalf (or possibly, a later
ratification of the contract would suffice).

(iv) Any difficulties about consideration moving from the stevedores were overcome.

In New Zealand Shipping v Satterthwaite, the factual situation was similar to Midland except that the contract
between the consignors and the carriers was much more complex and clearly sought to give the stevedores the
benefit of the exclusion clause. The first three of Lord Reid’s four conditions were satisfied. The contract expressly
extended the benefit of the exclusion clause to any agents employed by the carriers. The carriers had also
contracted as agents of the stevedores and they were authorized by the stevedores to so act.

The principal problem lay in locating the consideration provided by the stevedores for the consignor’s offer of
immunity. The solution adopted proceeded in two stages. First, it was held that when the consignors signed the
contract, they made an offer to the world at large that anyone who unloaded their goods would be entitled to the
benefit of the exclusion clause. Secondly, that this offer was accepted by the stevedores unloading the goods at
the port of discharge and at that moment a binding contract came into existence between the consignors and the
stevedores. The consideration supplied by the stevedores was the performance of their contractual duty owed to
the carriers.

(f) Damages on behalf of third party

Where the promisee sues for damages as a result of the promisor failing to confer the promised benefit on a third
party, the question arises whether he can recover anything other than nominal damages. Strictly speaking, the
promisee will not have suffered any direct loss; it is the third party that was to be the beneficiary of the promise.
Nonetheless, in Jackson v Horizon Holidays, it was decided that a contracting party could recover substantial
damages for the loss caused by to the third party. The House of Lords disapproved of this in Woodar Investment
Development v Wimpey but did not overrule it. They accepted that the ultimate decision was correct but suggested
that the loss of enjoyment by Mr. Jackson’s family was a loss to Mr. Jackson himself.

In The Albazero, the court recognized that when a seller and a carrier contract in contemplation of a second
contract with the buyer, the seller can recover substantial damages on behalf of the buyer where the goods are lost
or damaged by the carrier.

The more recent case of Linden Gardens Trust v Lanseta Sludge Disposals building upon Lord Diplock’s judgment
in Albazero, allowed the promisee to recover damages on behalf of the third party as the promisor knew that the
subject matter of the contract would be acquired by the third party.

However, in Panatown v Alfred McAlphine Construction, the House of Lords made it clear that if the contractual
arrangement between the parties in fact provided the third party with a direct remedy against the promisor, then the
exception in Linden Gardens could not be relied upon.

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(g) Trusts

A contracting party can specify that the benefit of the contract is held by him in trust for a third party, in which case
that third party will have enforceable rights to the benefit. At one time, the courts seemed willing to imply such a
trust even though there was no specific reference to a trust in the contract: Les Affreteurs SA v Leopold Walford.
But later onwards, in Vadepitte v Insurance Corporation the Privy Council demanded a definitive intention to create
such a trust.

Contracting parties will rarely intend to create a trust because it would mean that they are not free to vary the terms
of their agreement in the future as it would interfere with the beneficiary’s rights. As they are unlikely to intend such
a restriction on their right to vary their contractual obligations, this exception is practically of no use.

(h) Restrictive covenants

A restrictive covenant is a legal obligation imposed in a deed by the seller upon the buyer of real estate to not do
something. Such a restriction frequently "runs with the land" and is enforceable on subsequent buyers of the
property. See Tulk v Moxhay.


Arguments in favour of the doctrine of privity:

    o    The doctrine clearly defines the ambit and enforceability of contractual obligations.

    o    It can ensure that courts do not create a contractual obligation.

    o    It operates in tandem with the requirement that consideration must move from the promise and that a
         gratuitous third party beneficiary should not be given the right to enforce a contractual benefit.

    o    It would not be desirable for a promisor to face actions for breach of contract from both the promisee and
         the third party.

    o    If the third party could enforce the contract, this would affect the ability of the parties to vary or terminate
         the contract.

Arguments against the doctrine of privity:

     o It leads to commercial inconvenience.

     o It can operate to create great injustices.

     o It defeats the intentions of the parties to the contract.

     o It puts English contract law in an anomalous position; the contract law of other countries does recognize
       third party rights.

     o It creates uncertainty in contractual relationships given the number of common law devices which exist to
       circumvent the application of the doctrine.

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                               Part IV - Vitiating Factors
The presence of a vitiating factor may render a contract void, voidable or unenforceable.

A void contract is one where the whole transaction is regarded as a nullity. It means that at no time has there
been a contract between the parties. Any goods or money obtained under the agreement must be returned as per
the law of restitution (to the extent permitted). Where items have been resold to a third party, they may be
recovered by the original owner.

A voidable contract is a contract that operates as a valid contract until one of the parties takes steps to avoid it.
Anything obtained under the contract must be returned in so far as this is possible using the remedy of rescission.
If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them.

An unenforceable contract is one that exists but cannot be enforced in the courts if a party refuses to carry out its
terms. Items received under the contract cannot usually be reclaimed – the loss lies where it fell.

Minors: As a general rule, a contract with a minor is binding only on the other party. Alternatively expressed, such
a contract is not enforceable against the minor (unless he ratifies it after attaining majority). Minority acts as a
defence to a claim brought against the minor by an adult.

The harshness of the rule that a minor can sue but cannot be sued under a contract is mitigated by section 3(1) of
the Minors' Contracts Act 1987 which allows for restitutionary recovery against the minor if it is "just and equitable
to do so".

However, contracts of necessaries (section 3(2) of Sale of Goods Act 1979; Peters v Fleming and Nash v Inman)
and contracts of employment for the benefit of the minor (Clements v London Railway and De Francesco v
Barnum) are valid and binding on the minor.

Note that there is an anomalous category of contracts which are voidable at the option of the minor. This category
includes contracts to lease or purchase land, marriage settlements, contracts to purchase shares and contracts of
partnership. These contracts are binding on the minor unless he repudiates them during minority or within
reasonable time of attaining majority.

Also note that a minor cannot be sued in tort if the effect of the tort action would be to undermine the protection
afforded by the law of contract. So, for example, a minor cannot be sued for the tort of deceit when he fraudulently
misrepresents his age: Leslie v Sheill.

Mentally incapacitated persons: As per section 2 of The Mental Incapacity Act 2005, a person lacks capacity in
relation to a matter if at the material time he is unable to make a decision for himself because of an impairment of
the functioning of the mind; the impairment may be permanent or temporary.

Section 7 states that if necessary goods or services are supplied to a person who lacks capacity to contract, he
must pay a reasonable price for them. Necessaries are defined to mean suitable to a person’s place in society and
his actual requirements when the goods or services are supplied.

At common law, if the incapacity is known or ought to have been known to the other party, then the contract is set
aside: Imperial Loan Co v Stone

Where the incapacity is genuinely unknown, the contract can only be set aside in case of an unconscionable
bargain: Hart v O’ Connor

Drunkenness is treated in the same manner as mental incapacity. A contract may be set aside by a drunken party
where his drunkenness prevented him from understanding the transaction and the other party knew of his
incapacity: Gore v Gibson

Companies: The rule established in Ashbury Railway Carriage v Riche was that a contract which is ultra vires a
company is void. The effect of s. 39(1) of the Companies Act 2006 is virtually to abolish the doctrine of ultra vires in
relation to third parties who deal in good faith with the company.

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A representation is a statement which simply asserts the truth of a given state of facts.

A promise is a statement by which the maker of the statement accepts or appears to accept an obligation to do or
not something: Kleinwort Benson Ltd v Malaysia Mining Corporation.

         A general duty to disclose does not exist but one should not make active misrepresentations:
          Keates v Cadogan.

          But a duty to disclose does arise in certain situations:

                o    If the seller is aware that the buyer has misunderstood the terms of his offer i.e. he must disclose
                     the existence of the unilateral mistake: Smith v Hughes
                o    If the defendant’s conduct gives a wrong impression he is under an obligation to correct it:
                     Spice Girls v Aprilia World Service
                o    Subsequent falsity: With v O’Flanagan
                o    Statement literally true but misleading (partial disclosure): Notts Patent Brick v Butler
                o    Contracts requiring utmost good faith (‘Uberrimae Fidei’) e.g. insurance contracts
                o    Where there is a fiduciary relationship e.g. lawyer-client or trustee-beneficiary

A misrepresentation is an unambiguous false statement of fact which is addressed to the party misled, inducing it
to enter the contract. A misrepresentation renders a contract voidable.

         The misrepresentation must be a statement of fact:

                o    Can be made by conduct: Gordon v Selico
                o    Should not be a mere ‘puff’: Dimmock v Hallett
                o    Should not be merely an opinion: Bisset v Wilkinson
                o    Where the representor has greater knowledge than the representee, the courts will imply that the
                     representation must be made with reasonable care and skill: Esso Petroleum v Mardon
                o    Misrepresenting one’s present intention is a false statement of fact: Edgington v Fitzmaurice

          The misrepresentation must have been addressed to the party misled: Commercial Banking v RH Brown

          The misrepresentation must have induced the representee into making the contract:

                o    If the misrepresentation would have induced a reasonable person to enter into the contract, the
                     court will presume that it did and the onus of proof is then placed on the representor to show that
                     the representee did not in fact rely on the misrepresentation: Museprime properties v Adhill
                o    The misrepresentation does not have to be the sole or main factor inducing the representee into
                     the contract: Edgington v Fitzmaurice
                o    No inducement if the claimant is unaware of the misrepresentation: Horsfall v Thomas
                o    No inducement if the claimant knows the representation to be untrue
                o    No inducement if representation does not affect the claimant’s judgment: Smith v Chadwick
                o    No inducement if the representation had been verified by the third party and there was reliance on
                     the verification: Atwood v Small
                o    It is irrelevant that the claimant has the opportunity to verify the veracity of the representation but
                     does not take it: Redgrave v Hurd*

* This principle is in doubt: Smith v Eric Bush
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          There are four types of misrepresentations:

               o    Fraudulent misrepresentation (tort of deceit): Derry v Peek
               o    Negligent misrepresentation under common law: Hedley Byrne v Heller
               o    Negligent misrepresentation under s.2(1) Misrepresentation Act 1967: Howard Marine v Ogden
               o    Innocent misrepresentation: Routledge v McKay

      Exam tip: Note the three distinct advantages that misrepresentation under statute enjoys: (i) there is no
     need to prove a ‘special relationship’ between the parties or for that matter, any form of fraud (as the word
     ‘negligent’ should clearly indicate), (ii) the onus of proof is on the misrepresentor and (iii) the measure of
     damages is the same as that for fraudulent misrepresentation. But also note the distinct limit on the scope of
     this form of misrepresentation: it has no applicability where the representation is made by a third party who is
     not a party to the contract – an uncommon occurrence on the exam. On balance, misrepresentation under
     statute will be the form of misrepresentation that you will usually advise the claimant i.e. the representee to
     sue under.

          There are two remedies for misrepresentation and they are available for all types of misrepresentations:

          (a) Rescission

              When rescission occurs, the transaction is unwound in order to restore the parties, as far as possible,
              back to the position in which they were before they entered into the contract (the status quo ante).

              Notice indicating intention to rescind must be given to relevant third parties:
              Car and Universal Finance v Caldwell

              Right to rescission may be lost in four ways:

              (i) By affirmation: Long v Lloyd
              (ii) Lapse of time: Leaf v International Galleries
              (iii) Where restitutio in integrum* is impossible: Vigers v Pike
              (iv) Where it would affect third party rights: Phillips v Brooks

          (b) Damages

              In the law of tort, damages seek to protect the reliance interest. The test for remoteness of damage
              varies for the different forms of misrepresentation.

              For fraudulent misrepresentation the defendant is liable for all actual damage flowing directly from the
              misrepresentation: Doyle v Olby

              For negligent misrepresentation under statue the test is the same i.e. the defendant is liable for all
              actual damage flowing directly from the misrepresentation: Royscot Trust Ltd v Rogerson

              For negligent misrepresentation under common law, the defendant is liable for damages that were
              reasonably foreseeable.

              Damages may be available in lieu of rescission in cases of innocent misrepresentation:
              William Sindall v Cambridge County Council
              An indemnity payment (a personal restitutionary claim) may be ordered: Whittington v Seale Hayne

          Section 3 of the Misrepresentation Act 1967 makes a clause excluding liability for misrepresentation
           subject to reasonableness as per section 11 of UCTA 1977. An application of this section can be seen in
           Walker v Boyle.

           Entire agreement clauses seem to fall within the scope of section 3.

* ‘restoration to the original condition or position’
  Since the law now allows for damages in cases of innocent misrepresentation, it is arguable that this remedy is redundant.
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Mistake: One or both of the parties believe that a given set of facts exist and this belief subsequently turns out to
be wrong. An operative mistake will render a contract void.

The mistake must exist at the time of contract formation: Amalgamated Investment v John Walker

A common mistake is one which both parties make regarding the same fact(s). It can be of three types:

  (a) Mistake as to the existence of the subject matter of the contract (Res Extincta)
      Couturier v Hastie & McRae v Commonwealth Disposals Commission

  (b) Mistake as to possibility of performing the contract:

      Physical impossibility: Sheikh Brothers Ltd v Ochsner
      Legal impossibility: Cooper v Phibbs
      Commercial impossibility: Griffith v Brymer

  (c) Mistake as to quality of the subject matter is usually not a fundamental one:

      Bell v Lever Bros & Solle v Butcher* & Leaf v International Galleries & Great Peace v Tsavliris Salavage

      Exception: Nicholson & Venn v Smith-Marriot

A mutual mistake occurs where the terms of the offer and acceptance suffer from such latent ambiguity that it is
impossible to impute any agreement between the parties and the parties can be said to be at cross purposes.

Raffles v Wichelhaus & Scriven Brothers v Hindley

A unilateral mistake is one which only one party makes regarding a particular fact.

(a) When one party is mistaken as to the terms of the offer and the other party is aware or ought to be aware of it,
    the ‘aware’ party will be unable to enforce his version of the contract as he had a duty to disclose the existence
    of the mistake (snatching a bargain).

     Hartog v Colin and Shields & Smith v Hughes & Statoil v Louis Dreyfus

(b) A unilateral mistake as to the identity of the other party will render the contract void. Case law suggests that a
    court is more likely to conclude that the contract is void where it has been reduced to writing because in face to
    face dealings there is a firm presumption that the party intended to deal with the person physically in front of

    Cundy v Lindsay – Written contract; rogue assumes identity of real person: contract is void
    Kings Norton Metal Co v Edridge – Written contract; rogue assumes identity of fictional person: contract is not void
    Phillips v Brooks – Face to face dealing; telephone directory irrelevant: not void
    Lake v Simmonds – Face to face dealing; person well known; no steps taken to verify identity: void
    Ingram v Little† – Face to face dealing; telephone directory relevant: void
    Lewis v Avery – Face to face dealing; identity card irrelevant: not void
    Shogun Finance v Hudson – Face to face dealing b/w third party and rogue but written contract b/w claimant and rogue: void

 Exam tip: In spite of the inconsistent case law, in face to face dealings, look for the following four factors before
labelling a contract void: (i) the claimant intended to deal with someone else (this is easy to establish if the rogue
impersonates an acquaintance); (ii) the party they dealt with knew of this mistake; (iii) the claimant regarded
identity as of crucial importance and (iv) the claimant took reasonable steps to verify the identity of the other party.

* Although this decision is no longer good law as mistakes of law are now recognized and the doctrine of ‘mistake in equity’ no longer exists, it
is illustrative of the confusing nature of the topic.
  This decision is unlikely to be followed.
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         Illegality may affect a contract in two principal ways: (i) the contract is illegal at the time of formation and (ii)
          the contract is valid but is performed in an illegal manner.

         Illegality in performance: If the illegality arises in the performance of an otherwise valid and enforceable
          contract, the illegality will not invalidate the contract unless it was the purpose of the statutory or common
          law rule that a breach committed in the course of the performance of a contract should invalidate the
          contract: St John Shipping Corp v Joseph Rank & Shaw v Groom.

          Knowledge of the innocent party is a relevant factor: Archbolds v Spanglett & Ashmore v Dawson

         Illegality at formation: A contract is illegal if its formation is expressly or impliedly prohibited by statute or
          is contrary to public policy.

          (a) Statutory prohibitions:

                    o     Express statutory prohibition: Section 2(4) Competition Act 1998
                    o     Implied statutory prohibition: Re Mahmoud and Ispahani

          (b) Common law (public policy) prohibitions:

                    o     Contracts to commit a crime, tort or fraud: Alexander v Rayson
                    o     Contracts promoting sexual immorality: Pearce v Brooks
                    o     Contracts prejudicial to family life: Lowe v Peers
                    o     Contracts prejudicial to public safety: Foster v Driscoll
                    o     Contracts prejudicial to the administration of justice: Elliot v Richardson
                    o     Contracts promoting corruption in public life: Parkinson v College of Ambulance
                    o     Contracts in restraint of trade: Nordenfelt v Maxim Nordenfelt

         Effects of Illegality: Illegality renders a contract unenforceable* and the courts will not usually permit the
          recovery of money or property under an illegal contract (as illegality is normally used as a defence to a
          restitutionary action which would have otherwise succeeded). See Holman v Johnson

          However, the courts have allowed the recovery of benefits under illegal contracts in three scenarios:

          (i) Where the parties are not at equal fault (‘in pari delicto’): Oom v Bruce & Hughes v Liverpool Society

          (ii) Where the claimant has repudiated the illegal purpose in time: Kearley v Thomson

          (iii) Where the claimant does not found his claim on the illegality: Bowmakers v Barnet Instruments

          Note that sometimes restitutionary recovery seems to have the same effect as enforcing the contract.

          Also note that if a statute specifically provides for the consequences of a contract contravening one of its
          provisions, the express statutory language will prevail.

         Severance: Severance involves the court in removing the objectionable parts of a contract whilst enforcing
          the remainder. Severance of a clause will only be allowed if the clause forms a subsidiary rather than
          substantial part of the contract. This power is seldom used as it may be considered tantamount to
          condoning unlawful activities. See Goodinson v Goodinson.

* The labels ‘void’ and ‘unenforceable’ are not used with any sort of consistency in this area of the law.
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                                     Duress and Undue Influence

Both the common law doctrine of duress and the equitable doctrine of undue influence render a contract voidable.

The following conditions must be satisfied in order for a finding of duress:

       Physical threats or economic pressure amounting to coercion of the will was exerted on the victim.
        Whether the victim protested at the time or took steps to avoid the contract once he entered it will be
        relevant considerations when determining coercion.
        Barton v Armstrong & The Atlantic Baron & Pau On v Lau Long

       The claimant had no practical alternative course but to enter or modify the contract:
        Pao On v Lau Long & The Universe Sentinel & B&S Contracts v Victor Green Publications

       The pressure was illegitimate. A threat to do an unlawful act such as commit a crime or tort or break a
        contract will always be illegitimate but lawful acts can also be considered illegitimate in the appropriate
        circumstances: The Universe Sentinel & CTN Cash and Carry Ltd v Gallaher

 Exam tip: Be prepared to discuss economic duress in an essay question on ‘practical benefit’.

Undue influence occurs where one party improperly uses their influence over the other to induce them into a

       Two fold classification offered in Barclays Bank v O’Brien:

        (i) Actual Undue Influence: This arises where the claimant can prove that he entered the transaction as
        result of undue influence from the other party. It tends to be similar to, but falls short of duress. It usually
        involves some improper conduct, some overreaching, some form of cheating and generally, though not
        always, some personal advantage is claimed. In a situation of actual undue influence, it is not necessary to
        show that the transaction was manifestly disadvantageous to the party subject to undue influence.

        See Lloyds Bank v Bundy

        (ii) Presumed Undue Influence: This may be presumed where there is a pre-existing relationship of
        confidence between the two parties to a contract, as result of which one places trust in the other and the
        contract between them is manifestly disadvantageous to the party who places trust in the other. The
        defendant can rebut the presumption by showing that the claimant acted independently and that he
        understood his actions. This is commonly achieved by establishing that independent advice was taken by
        the claimant.

        See RBS v Etridge (No. 2)

       A third party may be affected by undue influence. For example, a husband may persuade his wife to
        guarantee his company’s overdraft with a bank, using the matrimonial home, of which she is a joint owner,
        as security for the debt. In such situations, the creditor may be ‘tainted’ by the undue influence of the
        intermediary. See CIBC Mortgages v Pitt

 Exam tip: Remember: undue influence focuses upon the relationship between the parties whereas duress
examines the method used to reach a contract.

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                            Part V - Discharge and Remedies

                                                Discharge by Performance

         The entire obligations rule: starting position is that complete performance of the contract is required to sue
          on it: Cutter v Powell*

         But substantial performance allows a party to enforce a contract: Hoenig v Isaacs & Bolton v Mahadeva

         Partial performance only allows for restitutionary recovery: Sumpter v Hedges

         If a contract is divisible i.e. capable of severance into separate obligations, a party may claim payment for
          the performance of a particular obligation: Roberts v Havelock

         A party can sue if his performance is incomplete due to the actions of the other party: Planche v Colburn

         Vicarious performance is not permitted where the contract involves the personal skill, judgment or abilities
          of the party: Davies v Collins

         Time is usually not of essence in the absence of an express provision; delayed performance only gives the
          innocent party a right to damages. However, a buyer may make time of the essence after a seller does not
          deliver on time by calling on him to deliver within a reasonable time on pain of having the goods rejected if
          this does not happen. Provided the court later agrees with the buyer’s assessment of what was a
          reasonable further time for delivery such a notice will be effective: Charles Rickards Ltd. v Oppenheim

         The order in which obligations are to be performed may depend on whether the various promissory
          conditions are construed as conditions precedent, conditions concurrent or conditions subsequent:
          Trans Trust SPRL v Danubian Trading

                                                      Discharge by Breach

         A breach of contract is committed when a party fails or refuses to perform what is due from him under the
          contract or performs defectively or incapacitates himself from performing without lawful excuse.

         Breach of a warranty gives the innocent party the right to claim damages.

         Breach of a condition or a sufficiently serious breach of an innominate term (a repudiatory breach) gives
          the innocent party the option† to terminate or affirm the contract in addition to the right to claim damages.

               o     The decision has to be communicated: Vitol SA v Norelf Ltd

               o     The motive for the decision is irrelevant: Arcos v Ronaasen

               o     A valid reason for termination which is subsequently discovered is okay: The Milhalis Angelos

               o     Acceptance of further performance amounts to affirmation of the contract: Davenport v R

               o     The decision cannot be revoked; it is permanent: Johnson v Agnew

               o     Decision to terminate operates prospectively i.e. both parties are relieved of their obligations to
                     perform in the future but the contract is not void ab initio: Photo Production v Securicor Transport

               o     If the option to terminate is wrongly exercised the party will itself be in breach of contract:
                     Decro-Wall v International Practitioners in Marketing

* Such factual scenarios would now be decided differently as per the Law Reform (Frustrated Contracts) Act 1943
  Alternatively described as ‘right of election’ or ‘right to rescind’ – the latter description is misleading as it connotes a link with the equitable
remedy of rescission. Also avoid the discussion of how affirming a contract is a ‘waiver by election’.
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   Party in breach cannot usually enforce the contract against the innocent party.

    Exception: Independent obligations or conditions: Taylor v Webb

   An anticipatory breach occurs where one party informs the other before the time fixed for performance
    that he will not perform his obligations under the contract. The renunciation must be such as to prove that
    the party in breach ‘acted in such a way as to lead a reasonable man to conclude that he did not intend to
    fulfil his part of the contract’.

    An anticipatory breach entitles the innocent party to terminate performance of the contract immediately –
    damages can be claimed on the date of the acceptance of the breach: Hochster v De La Tour

        o   After affirming the contract, the innocent party may continue to perform even though he knows the
            performance is not wanted by the other party: White and Carter v McGregor

        o    However, the innocent party must have a ‘legitimate interest’ in continuing performance i.e. it must
             not act ‘wholly unreasonably’: The Alaskan Trader

        o    The innocent party cannot compel the party in breach to cooperate with him so that, where the
             innocent party cannot continue without the cooperation of the party in breach, he will be
             compelled to accept the breach: Hounslow LBC v Twickenham

   There are two potential disadvantages for the innocent party in affirming the contract after an anticipatory
    breach: Firstly, the innocent party may lose his right to sue for damages completely if the contract is
    frustrated between the date of the unaccepted anticipatory breach and the date fixed for performance.
    Secondly, an innocent party who affirms the contract but subsequently breaches the contract himself
    cannot argue that the unaccepted anticipatory breach excused him from his obligation to perform under the

                                   Discharge by Agreement

   In general, an agreed discharge will be binding if it contains the same ‘ingredients’ that make a contract
    binding when it was formed.

   Where performance has not been completed by either party to the contract, there is generally no difficulty
    in finding consideration because, in voluntarily giving up their rights to compel each other to perform, each
    party is giving something to the bargain and so consideration is given.

   But where the contract is wholly executed on side, an agreement to abandon the contract will not be
    automatically supported by consideration as the discharge is for the benefit of one party only. This new
    agreement (accord), in order for it to be effective, must be supported by fresh consideration (satisfaction).
    Note that there will be no need for fresh consideration if the new agreement is in the form of a deed.
    Moreover, if the doctrine of promissory estoppel or the doctrine of waiver applies, the unilateral discharge
    will be effective without the need for accord and satisfaction.

     Exam tip: Variation of an existing contract or waiver of a particular obligation is usually discussed in a
    question on consideration/estoppel.

   Novation is a term usually used to describe the act of replacing a party to an agreement with a new party.
    In contrast to an assignment, which is valid so long as the person receiving the benefit of the contract is
    given notice, a novation is valid only with the consent of all parties to the original agreement: the obligee
    must consent to the replacement of the original obligor with the new obligor. A contract transferred by the
    novation process transfers all duties and obligations from the original obligor to the new obligor.

    For example, if there exists a contract where A will give £100 to B and another contract where B will give
    £100 to C then, it is possible to novate both contracts and replace them with a single contract wherein A
    agrees to give £100 to C. Consideration is still required for the new contract but it is usually assumed to be
    the discharge of the former contract.

   When the parties have agreed on the occurrence of a contingent condition subsequent, the contract will be
    discharged if it indeed occurs.
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                                        Discharge by Frustration

     Frustration: A contract is frustrated where, after the contract was concluded, events occurs which make
      performance of the contract (i) impossible, (ii) illegal or (iii) something radically different from that which
      was in contemplation of the parties at the time they entered into the contract.

     When a frustrating event occurs, a contract is terminated. Obligations cease to exist from that point
      onwards. The contract is not treated as void ab initio.

     Impossibility can arise due to:

      (a)   Destruction or unavailability of something essential: Taylor v Caldwell & Jackson v Union Marine
      (b)   Temporary but prolonged unavailability of the subject matter: The Nema
      (c)   Prescribed method of performance impossible: Nickoll v Ashton
      (d)   Incapacity or unavailability of a party: Robinson v Davis
      (e)   Death of a contracting party providing personal services: Whincup v Hughes

     Supervening illegality: Fibrosa v Fairbairn

     Purpose of the contract can be defeated by radical change in circumstances:
      Krell v Henry & Herne Bay Steam Boat Co v Hutton

     There are four limitations upon the operation of the doctrine of frustration:

    (i) Mere economic hardship shall not constitute a frustrating event: Davis Contractors Ltd. v Fareham UDC
    (ii) Express provision (e.g. a ‘force majeure’ or hardship clause): Metropolitan Water Board v Dick, Kerr & Co.
    (iii) Frustration cannot be a foreseeable event within contemplation of the parties: Walton Harvey v Walker
    (iv) Frustration should not be self induced: The Super Servant Two

     Effects of frustration:

      (a) At common law: Fibrosa v Fairbairn & Appleby v Myers

      (b) Modern approach: Law Reform (Frustrated Contracts) Act 1943

      Section 1(2): The principal effect of the subsection is to (i) entitle a person to recover money paid under a
      contract prior to the frustrating event, (ii) remove any obligation to pay money that existed prior to the
      frustrating event and (iii) entitle a payee to set off against the sums so paid, expenses which he has
      incurred prior to the discharge, in the performance of the contract: Gamerco SA v ICM

      Section 1(3): If before the frustrating event one party obtains a valuable benefit (other than money)
      because of something done by the other in performance of the contract, the party receiving the benefit can
      be ordered to pay a just sum in return for it. This provision has caused the most problems in practice for
      the courts. First, a court has to identify the valuable benefit i.e. value of the end product; secondly, it has to
      award a just sum for that benefit: BP Exploration v Hunt

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   The aim of damages is to compensate the injured party’s losses and not to punish the party in breach.
    Punitive damages cannot be imposed even if the defendant calculated that he would make a profit from his
    breach: Cassel v Broome

   There are basically three types of interests that damages try to protect i.e. expectation interest, reliance
    interest and restitution interest.

   A claimant has a right to choose between expectation or reliance interest: CCC Films v Impact Films

   An award of damages generally seeks to protect the claimant’s expectation interest: Robinson v Harman

   Non-pecuniary losses are generally not recoverable: Addis v Gramophone & Hayes v Dodd

              o Where the purpose of the contract is mainly pleasure: Jarvis v Swan Tours & Farley v Skinner
              o Where the purpose is to relieve a source of distress: Heywood v Wellers
              o Where breach leads to mental suffering caused by physical inconvenience: Perry v Sidney
              o Where breach leads to a loss of reputation: Johnson v Unisys Ltd
              o Where the contract was for the provision of a pleasurable amenity: Ruxley Construction v Forsyth

   Expectation loss is calculated or quantified in many ways:

      (i)     Difference in value between claimant’s expectation and what he received: Ruxley v Forsyth
      (ii)    Cost of cure: Ruxley Electronics v Forsyth
      (iii)   Loss of opportunity damages: Chaplin v Hicks
      (iv)    Market Price rule: Thompson Ltd v Robinson & Lazenby Garages v Wright

   Unjust benefit/profit made by the defendant is usually unrecoverable:
    Surrey CC v Bredero Home & Attorney General v Blake

   Reliance loss can include pre-contractual expenditure: Anglia Television v Reed but it can not be used to
    compensate for a bad bargain: Haulage v Middleton. It may be claimed instead of expectation loss where
    that is too speculative: McRae v Commonwealth Disposals Commission though Chaplin v Hicks states

   There are many limitations on damages for expectation loss:

    (a) Causation: Quinn v Burch Builders

    (b) Remoteness of damages: Hadley v Baxendale & Heron II & Victoria v Newman & Parsons v Ingham

    (c) Mitigation: Brace v Calder & Pilkington v Wood & British Westinghouse v Underground Electric

    (d) Contributory Negligence: Vesta v Butcher

   Damages are to be assessed as at the date of breach: Johnson v Agnew but where the claimant is
    unaware of the breach, damages will generally be assessed as at the date on which the claimant could,
    with reasonable diligence, have discovered the breach. Similarly, where it is not reasonable to expect the
    claimant to take immediate steps to mitigate his loss, the date of assessment will be postponed until such
    time as it is reasonable to expect the claimant to mitigate his loss: Radford v De Froberville

   Criteria for differentiating between a liquidated damages clause and a penalty clause:

    Dunlop Pneumatic Tyre v New Garage & Motor & Phillips Hong Kong v Attorney General of Hong Kong

   There are two ways of having a fixed sum payable stipulated in the contract without the clause being
    considered a penalty clause:

    (i) The clause merely accelerates an existing liability: Protector Loan v Grice
    (ii) The amount shall be payable on an event which is not a breach of contract: Alder v Moore
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                                           Other Remedies

   Action for an agreed sum (a claim in debt)

    A contract will often require one party to pay money as the party’s performance. If one party has fulfilled all
    contractual requirements for the money due to him, then if the other party refuses to pay, he may be able
    to claim the sum due under the contract rather than damages.

    An action for the sum due under the contract is a form of specific enforcement of the contract but as it
    involves only the payment of a debt, it does not involve the same restrictions as an action for specific
    performance or an injunction. In addition, it is not subject to the uncertainty and restrictions of the rules on
    damages (e.g. the rule of mitigation does not apply).

   Specific performance

    An order for specific performance requires the party in breach to perform his obligations under the contract.

        o   It is appropriate only if damages are an inadequate remedy: Cohen v Roche & Johnson v Agnew

        o   Where it is extremely difficult to quantify the claimant’s loss: Decro Wall v Practitioners

        o   Where defendants are unable to pay an award of damages: Evans Marshall v Bertola

        o   Claimant’s own conduct must be equitable

        o   It must not be impossible to comply with the order

        o   It must not cause severe hardship to the defendant: Tito v Waddell

        o   It will not be ordered for a contract for personal services: Giles v Morris

        o   It will not be ordered where constant supervision will be needed: Co-op Insurance Society v Argyll

        o   In lieu of specific performance, damages must construe a true substitute: Wroth v Tyler

   Injunction

    An injunction is usually sought to enforce a negative stipulation in a contract.

    Page One Records v Britton & Lumley v Wagner & Warner Bros v Nelson

   Rectification

    This is an order which corrects a mistake in the recording of the agreement. The possibility of rectification
    exists where a written contract or deed fails to express the common intention of the parties.

    Frederick Rose v William Pim

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                                                      Law of Restitution

         Scope: A restitutionary claim arises when (1) the defendant has received a benefit; (2) its receipt was at
          the plaintiff’s expense; and (3) the circumstances are such that it would be unjust for the defendant to
          retain the benefit.

          Note that the phrase ‘at the plaintiff’s expense’ does not necessarily mean enrichment by subtraction i.e.
          the enrichment has arisen through a transfer from the plaintiff, leaving him with a loss corresponding to the
          defendant’s gain; it can also mean a gain that was obtained by inflicting a wrong upon the plaintiff.

         Applicability: As a practical matter, restitutionary claims usually arise:

          (1) when a contract has been declared void (e.g. mistake); or

          (2) when there has been a failure of consideration (e.g. frustration); or

          (3) when there has been a breach of fiduciary obligations.

         Remedies: The most common restitutionary remedies are:

          (1) Quantum Meruit or Quantum Valebat
          (2) Money had and received
          (3) Reasonable Use / License fee
          (4) Disgorgement / Account of Profits
          (5) Constructive trust*

         Note that there is a debate as to whether rescission is a restitutionary or contractual remedy. If rescission
          is a restitutionary remedy then it can be said that the act of rescinding a voidable contract is also governed
          by the law of restitution.

         There is limited scope for restitutionary damages where there has been a breach of contract:

          (a) Total failure of consideration: Whincup v Hughes & White Arrow Express v Lamey’s Distribution

          (b) Unjust benefit: Attorney General v Blake & Experience Hendrix LLC v PPX Enterprises Inc.

* This is not expressly recognized as a remedy in English law
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                                Deposits and Part Payments

   A clause in a contract which states that a certain sum of money shall be payable on breach of contract
    inevitably runs the risk that it will be held to be a penalty clause. It also has the disadvantage that the
    innocent party has to take the initiative to obtain the money. A preferable alternative might therefore be to
    obtain payment of a sum of money in advance and then refuse to return it in the event of the other party
    breaking the contract.

   In such a case, can the party in breach recover the prepayment? The answer to that depends upon
    whether the money was paid as a deposit or as a part payment of the price. A deposit is paid by way of
    security and is generally irrecoverable, whereas a part payment is paid towards the contract price and is
    generally recoverable. The difference between the two is a matter of construction. Where the contract is
    neutral then a payment will generally be interpreted as a part payment: Dies v British Mining.

   A critical limit upon the ability of parties to stipulate for excessive deposits was firmly established by the
    Privy Council in Workers Trust v Dojap Investments. The court held that it was “not possible for the parties
    to attach the incidents of a deposit to the payment of a sum of money unless such sum is reasonable as
    earnest money”.

   There is some difficulty in establishing what a ‘reasonable deposit’ is given that even a reasonable deposit
    need not represent a genuine pre-estimate of the loss likely to be occasioned by the breach. It is not at all
    clear how the courts will decide what constitutes a ‘reasonable deposit’ where there is no objective
    benchmark prevalent in the industry.

   Another point that was decided in Dojab was that in the event of the deposit being declared unreasonable,
    the court will not rewrite the contract by inserting into it a ‘reasonable’ deposit. This will provide an
    incentive to contracting parties to err on the side of caution when deciding the level of any deposit payable
    - thus placing limits upon the ability of contracting parties to provide for excessive deposits.

   In Hyundai v Papadopaulos, it was held that where it is clear from the contract that the payee will have to
    incur reliance expenditure before completing his performance of the contract, then, in the absence of a
    stipulation in the contract to the contrary, the part payment will be irrecoverable. A part payment is
    therefore recoverable only where it is clear from the contract that the payee will not have to incur reliance
    expenditure before completing his performance of the contract.

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                                     Extinction of Remedies

   Where one party has a right to sue for breach of contract, it may be extinguished by agreement between
    the parties, either under seal or by accord and satisfaction. Such a right can also be extinguished by the
    passage of time, under the Limitation Act 1980. The Act lays down various time limits for different kinds of
    action and once these have expired, the claimant is said to be ‘statute-barred’ or ‘time-barred’ from

   Contract proceedings should normally be brought within six years of when the cause of action accrued.

   Cause of action means the facts giving rise to the action and will usually be when the contract is

   An action based on a contract made by deed must be brought within 12 years of the date on which the
    cause of action accrued.

   There are cases where the claimant does not know that there is a cause of action at the time when the
    situation occurs and may not know for some time afterwards, possibly not even until the ordinary limitation
    period has passed. The issue is addressed in the Latent Damage Act 1986, which provides that where the
    cause of action could not be discovered when it arose, the claimant can sue within three years of the time
    when it could be discovered. In addition, section 32 of the Limitation Act 1980 provides that when a
    claimant is unaware of the cause of action at the time it accrues because of mistake or fraud by the
    defendant, the period of limitation does not begin until the claimant has discovered the fraud or mistake or
    until such time as they could have discovered it by using reasonable diligence.

   Where a claimant is under a disability, for example, he is a minor or is of unsound mind at the time when
    the cause of action accrues, the limitation period does not begin until the disability has ceased to operate.
    Therefore, a minor can bring proceedings relating to contractual matters that arose while they were a
    minor, for six years after their eighteenth birthday.

   The limitation period may be extended if, before it expires, the defendant acknowledges the claim or pays
    part of it (s.30). If this happens, the limitation period starts again on the date of the acknowledgement or
    part payment (s.29). In order for an acknowledgement to have this effect, it must be in writing, signed by
    the person making it and must clearly acknowledge the debt, not just the fact that a dispute exists.

   Section 36 of the Limitation Act 1980 makes it clear that the statutory limitation periods do not apply to
    claims for specific performance, an injunction or other equitable remedies. Instead, the equitable doctrine
    of ‘laches’ (delay) is applied; if taking account of all the circumstances of the case, the court considers that
    the claimant has been too slow in bringing the action, the equitable remedy sought will be refused.

   It is not possible to lay down strict rules on when laches will prevent a claim; in each case, it will depend on
    the length of the delay, how diligent the court believes the claimant ought to have been and the nature of
    the contract. Thus, where a defendant is seeking specific performance, a lengthy delay will be less
    acceptable if the contract concerns goods whose value fluctuates rapidly than in a case where prices
    remain steady.

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